U.S. to halt legal steps vs Corinthian student loan defaults

(Reuters) - The U.S. government has agreed to take no near-term legal action against 40,000 former students of the bankrupt Corinthian Colleges Inc who have defaulted on federal loans, according to a lawyer representing students.

Corinthian abruptly closed its remaining 28 schools in April and left 16,000 students without classes, becoming the largest failure in for-profit higher education. The company operated more than 120 campuses at its peak.

The company filed for bankruptcy in May and soon after the U.S. Department of Education announced a plan under which tens of thousands of former Corinthian students could seek relief from their federal student loans. However, a lawyer for the government told a court hearing on June 30 that fewer than 5,000 students had applied.

Under Thursday’s agreement, the Department of Education will suspend judicial debt collection efforts for 120 days against former Corinthian students who are in default, according to Scott Gautier, a lawyer for an official committee of students in the Corinthian bankruptcy.

A spokesman for the Department of Education did not immediately respond to a request for a comment.

During the 120-day period, Gautier said he hopes to negotiate debt relief for all former Corinthian students as part of the company’s liquidation plan. Corinthian lawyers have said they want the plan confirmed by U.S. Bankruptcy Judge Kevin Carey in Wilmington, Delaware, by the end of August.

A lawyer for the government declined at a recent court hearing to say how many students are facing legal action over unpaid student loans, but the number may be small. Gautier said he knew of proceedings against students in only 12 judicial districts.

The committee had asked Judge Carey to suspend debt collection efforts against all former Corinthian students, which covered more than 350,000 borrowers and billions of dollars in loans.

The student committee argued the debt was actually an obligation of Corinthian due to the company’s alleged misconduct, a line of reasoning that Gautier acknowledged at the June 30 hearing was unprecedented.

Corinthian is defending a number of lawsuits and government investigations. The Department of Education fined the company $30 million in April for misrepresenting job placement rates and California’s attorney general has sued the company for predatory advertising, among other allegations.

The company specialized in career training in healthcare and trades at its Heald College, Everest and WyoTech schools.